Mark has made many posts on the evils of VAT and its attractions for HMRC, but there is one particular evil that HMRC must love: it makes all VAT-rated businesses into unpaid tax collectors. The genius of the system is, for the taxman is that assessing the VAT the business has to pay is easy to check, just tot up all the VAT they've charged their customers.
However, the difficult bit, and the bit where HMRC have no incentive to lift a finger to help you, is assessing the VAT that you can claim back, which involves a huge amount of time sorting and entering purchase invoices, which tend to be far more numerous than sales invoices. This is a huge hidden expense, especially to small businesses just above the tax threshold.
If you are unlucky enough to try and make a living in the construction industry, HMRC has a special hell for you, called CIS. Based on the well-known fact that all builders are crooks, the CIS scheme forces building contractors not only to collect and hand over the income tax of their employees, but also of their subcontractors. Nor do they make this easy. Each subcontractor has to be "verified" using the sort of user-hostile computer system that everyone who deals with civil service IT knows about and dreads.
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MW adds:
It's worse than that. There are plenty of sub-contractors who aren't registered for gross payment (subtext: HM Revenue & Customs doesn't trust them to declare their income and pay over the income tax) but who are VAT-registered. If such a sub-contractor does £1,000's worth of work and puts in an invoice for £1,000 net plus £175 VAT, the main contractor deducts 20% quasi-income tax from the £1,000 but still adds on the VAT and pays him £975 cash.
This process will become even sillier next year when the standard rate of VAT increases to 20% as mandated by the EU, when such a sub-contractor will render an invoice for net £1,000 and receive £1,000 cash, but main contractor has the hassle of deducting £200 quasi-income tax and paying that over to HMRC using one set of forms; and the hassle of reclaiming the £200 VAT via its own VAT returns (unless the main contractor is exempt); and the sub-contractor has the hassle of keeping all the vouchers showing the £200 quasi-income tax withheld to offset against his own income tax or PAYE liabilities; and the hassle of completing VAT-returns and paying over the £200's worth of VAT.
Even ignoring the hassle involved (and spiteful penalties for non-compliance, late payment etc), if HM Revenue & Customs don't trust sub-contractors to pay over their income tax (they may well have a point), what makes them think that they will pay over their VAT?
Tuesday, 24 August 2010
The Unpaid Tax Collector
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6 comments:
Seriously, I hate CIS. The system is stacked against the small sub-contractor in a big way (possibly intentional, possibly unforseen) The big contractor (with fewer cashflow issues) deducts tax from the payments made to the subby (with more cashflow issues) and then remits it to HMRC on a monthly basis. Except not all of em do so correctly, there have been a number of situations where contractors have sent in false returns and made off with the deducted tax to a non-extradition country.
Not only this but now our wonderful government is butting its nose in where its not welcome and ensuring that a significant percentage of "sub-contractors" will be deemed as employees instead. This will have the dual effect of dicking the subbys out of additional tax & NI and putting small accountancy practices who have subbys as their main client base out of business.
The CIS, The Financial Services Authority, the whatever, it's all the same. These are bureaucratic systems designed to make us all guilty. They cannot control innocent men.
BTW the FSA is constituted under Napoleonic Law. It's an out post of the EU rotting like a cancer inside the body of English Common Law.
I think we are all just beginning to see the EU/Lab/Con game.
(subtext: HM Revenue & Customs doesn't trust them to declare their income and pay over the income tax)
or they are punishing you for being late with your payments when you were registered for gross payments.
Re your last comment: can anyone really be surprised that so much work is done in the building trade for cash in hand?
Slightly O/T, I can feel another "Killer argument against LVT, not" coming on.
The next time somebody says:
"But why should a developer pay tax on a site he hasn't finished and sold yet if he doesn't have the profits to pay it?"
I will reply: "Because it's easier and simpler just to pay the LVT as you go along - it's no worse than paying interest on the mortgage to buy the land in the first place (a privately collected land value tax) and because the overall tax burden would be less than PAYE, CIS, VAT and so on anyway".
"Even ignoring the hassle involved (and spiteful penalties for non-compliance, late payment etc), if HM Revenue & Customs don't trust sub-contractors to pay over their income tax (they may well have a point), what makes them think that they will pay over their VAT?"
Mark, don't say dangerous things like that. What'll happen next is that some underemployed bureaucrat in HMRC will say, isn't that a good idea? and hey presto, all the paperwork will be left in place, but instead of getting the 20% cash, which helps their cashflow, the poor bloody subby will get yet another voucher, to keep and to account to HMRC, while the main contractor is now responsible for paying his own VAT, his own PAYE, his subcontractors' income tax and his subcontractors' VAT.
What I don't like is that whenever the EU decides to "harmonise" anything such as tax rates its always at the high end of the scale. We will reach the point of civil war before we reach full EU integration, there is less and less incentive to actually do anything which actively contributes to the economy on an almost daily basis.
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